Credit, collections & insolvency news

Although the ongoing Brexit updates mean the announcement went under the radar, last month saw both Houses of Parliament agree to pass legislation that will put an end to Bans on Assignment. I’m sure you’ll agree that this is great news that many of your clients will see as a positive development.

Why are Bans on Assignment such a big issue?

Bans on Assignment are a type of contractual clause found in many debtors’ terms of sale agreements which prohibit the assignment of invoices to a third party. This therefore creates an environment where many SMEs are unable to raise money from unpaid invoices – increasing the pain caused by late payments.

SMEs and lenders alike are left struggling to overcome the obstacles created by Bans on Assignment clauses as currently they create a barrier when it comes to providing invoice finance. This is due to some financiers being hesitant to provide funding where the contract between clients and their customers contains this type of clause. If the financier IS prepared to provide funding, they will either have to find a workaround – such as requesting that the business approaches their customer for consent – adjust the pricing or request additional security from the client. Each of these options will add unnecessary time, will increase costs and generally make it difficult to obtain invoice finance. Unsurprisingly, this can result in SMEs either making do without the finance they require, or finding alternative types of funding that don’t align to their specific needs.

What does this update mean?

The removal of Bans on Assignment clauses means that your clients will be able to access invoice finance more easily. Your clients will therefore be able to assign receivables to invoice finance providers without having to spend time and money seeking consent from customers or trying to find workarounds to these clauses which can make things unnecessarily complex. From December 31st 2018, they’ll no longer have the swim against the tide to gain access to funding that releases finances tied-up in unpaid invoices – and can instead enjoy the benefits of a quick boost to their cashflow.

The regulation also makes any clause preventing a party from determining the value of a receivable and being able to enforce it ineffective. Again, this will increase the appeal of invoice finance for so many SMEs across the country.

Who does this change impact?

Obviously, this is great news for SMEs and funding partners across the UK. However, there are still some caveats to the legislation.

Firstly, the regulations only apply to contracts entered into on or after 31 December 2018. This does unfortunately mean that legacy agreements containing Bans on Assignment clauses will remain intact. To reduce the impact of this caveat, where possible your clients may want to look to renegotiate terms with partners if such clauses are found within contracts.

Another major caveat in play is that although Bans on Assignment will be null and void for SMEs from the end of the year, this isn’t the case for large enterprises – traditionally defined as businesses with more than 250 employees. Their contracts will still legally be able to contain such clauses, as will contracts relating to special purpose vehicles.

Finally, and perhaps most frustrating, is that the legislation passed only applies to contracts governed by the laws of England, Wales and Northern Ireland. This could directly impact more than 345,900 SMEs in Scotland that may be looking to invoice finance providers for funding support. Any businesses north of the border entering into invoice finance contracts that include Bans on Assignment will therefore need to continue finding workarounds for the foreseeable future.

Hopefully this won’t be a permanent issue however as the Scottish Government is likely to look at the UK Government’s footsteps and consider similar legislation to ensure SMEs north of the border aren’t at a disadvantage compared to the rest of the UK.

Options for Scottish SMEs

While Scottish SMEs wait to hear whether Bans on Assignment clauses will be outlawed for them in the near future, there’s a risk that some will find themselves at a disadvantage compared to their competition in the rest of the UK. At first it may not seem too big an issue that one particular clause is still in place but when you consider the difficulties it can pose when it comes to accessing funding, it could equate to a substantial cashflow gap which could hinder investment opportunities.

For example, if a company has a significant amount of partners that often fail to meet agreed payment deadlines, invoice finance may be the optimum option to relieve the issue. Not being able to access this could be the reason an SME is unable to replace legacy equipment, increase employee numbers, pitch for new business and scale up. When you begin to understand how each of these could stop an SME from meeting their full potential, you realise just how important it is that Bans on Assignment clauses are removed from Scottish contracts next year too.

What does the future hold?

Despite the caveats, it is great news for your clients that Bans on Assignment clauses will be null and void for the vast majority of UK SMEs come next year. This should result in a simpler invoice finance process and therefore more small businesses gaining access to the financial support they need to increase their resilience and ensure they thrive. I truly believe good funding does the world of good and this legislative change will facilitate exactly this.